A stochastic flows approach for asset allocation with hidden economic environment

Tak Kuen Siu

doi:10.1155/2015/462524

A stochastic flows approach for asset allocation with hidden economic environment

Tak Kuen Siu^*

^*Corresponding author for this work

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

11 Citations (Scopus)

40 Downloads (Pure)

Abstract

An optimal asset allocation problem for a quite general class of utility functions is discussed in a simple two-state Markovian regime-switching model, where the appreciation rate of a risky share changes over time according to the state of a hidden economy. As usual, standard filtering theory is used to transform a financial model with hidden information into one with complete information, where a martingale approach is applied to discuss the optimal asset allocation problem. Using a martingale representation coupled with stochastic flows of diffeomorphisms for the filtering equation, the integrand in the martingale representation is identified which gives rise to an optimal portfolio strategy under some differentiability conditions.

Original language	English
Article number	462524
Pages (from-to)	1-11
Number of pages	11
Journal	International Journal of Stochastic Analysis
Volume	2015
DOIs	https://doi.org/10.1155/2015/462524
Publication status	Published - 2015

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Copyright the Author 2015. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

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A stochastic flows approach for asset allocation with hidden economic environment

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